Eternal sunshine for dovish interest rate cuts in March
Perhaps the Federal Reserve should post a sign outside its front window. ecclesville The store, located on C Street in Washington, D.C., announced it will reopen in the fall.
Fed officials said they are closely monitoring data to determine when it is appropriate to lower their target federal funds rate. However, economic indicators clearly show that the economy has not slowed down as much as expected in the fourth quarter of 2023, although consumer spending has accelerated and the labor market remains resilient. Markets cling to the belief that a rate cut is near The second or third Federal Open Market Committee (FOMC) meeting this year.
As of Thursday afternoon, the market remained Fed to announce rate cut at first meeting in March. The probability of that happening is 55%, according to CME Group's FedWatch tool, a significant drop from the 75% chance suggested by swap prices a few days ago. However, the following events are still very likely to occur: seems increasingly unlikely.
There's something better 90% chance of rate cut at May meeting, depending on the price of federal funds futures. The only real debate on Wall Street is between people and whether this will be the Fed's first or second rate cut.Another explanation is that some investors believe that the Fed Reduced in March, suspended in May.
The idea that the Fed won't cut rates at all before its June meeting in five months seems to have no credibility on Wall Street. The market suggests that the probability that interest rates will reach their current levels is currently zero. There is only a 7% chance that interest rates will be 25 basis points lower than the current target, a 42% chance that the rate will be 50 basis points lower, and a 46% chance that the target will be 75 basis points lower.
Traders work on the floor of the New York Stock Exchange on January 17, 2024 in New York City. Stock markets ended lower for the second straight day after the Commerce Department released better-than-expected U.S. economic data. (Michael M. Santiago/Getty Images)
With very few people pushing the idea of a January rate cut yet, this means the market believes it is very likely that the Fed will cut rates at each of its March-June meetings (there will be three). means. A more hawkish view is that the Fed will only cut rates twice.
Required and selected cuts
Looking further into the year, we see high confidence. continuous reduction. There is a 43% chance of a full rate cut by the July meeting. There is a 40% chance of a 125bp rate cut by September. That's where the market is pricing in a breather, with only a 27% chance of another rate cut in November (the sixth rate cut, totaling 150 basis points). However, by the December meeting, the probability of a six-person reduction has risen to 66%, and the probability of a seven-person reduction is 22%.
The market, in other words, reflects the view that the Fed is likely to: Start cutting early and continue cutting after each meeting..
But why would the Fed do this? History shows that cumulative rate cuts of that size (150 basis points) typically The Fed is trying to stem the economic downturn. When a rate-cutting cycle occurs during a “soft landing,” which is rare, the Fed only cuts rates by a total of 75 basis points on average. In other words, there is a big difference between what you can think of as: required cut and the chosen cut.
Not coincidentally, Economic forecast overview Statistics released after the Federal Open Market Committee meeting in December showed the Fed's median rate cut expected this year is 75 basis points. That's 3 cuts.
This distinction is required cut and the chosen cut what is that Fed Director Chris Waller Earlier this week, the Fed made headlines when it said it saw no reason to cut rates early or quickly.
“In many previous cycles that began after an economic shock threatened or caused a recession, the FOMC cut rates in response, quickly and often significantly,” Waller said. . “But I see economic activity and the labor market in good shape this cycle, with inflation gradually declining to 2%.” There's no reason to move this fast or cut this quickly. Like in the old days. ”
when the pigeon cries
On Thursday, we heard from one of the currently most dovish voting members of the FOMC: Atlanta Fed President Rafael Bostic. He could not be more specific about the timing of the cuts.
“The first rate cut right now will be sometime in the third quarter of this year,” Bostic said in remarks to the Metro Atlanta Chamber of Commerce board meeting, according to Bloomberg. No,” he said. news.
Rafael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, speaks in Atlanta, Georgia on November 3, 2023. (Elijah Nouvelage/Bloomberg via Getty Images)
it will put First rate cut at July or September meeting. It is important to note that the Fed “will have to see how the data develops” after that. Because it shows that: Once the Fed starts lowering rates, it doesn't necessarily mean they'll keep lowering them.. It may take time to see how the first rate cut is received by the market and the economy.
If the Fed cuts rates in July and skips September, it would need three more months of data to assess whether to cut rates again at its November meeting. Recall that the Fed skipped raising rates after its meeting last July, signaled that the hike was likely to be completed, and then paused for several months while assessing the timing of a rate cut. There will be a reduction in July, a reduction in September, and a reduction in November and December. In line with SEP's median forecast of 3 job cuts this year.
However, even after Mr. Bostick's statement, Market odds still favored Fed March rate cut. If the Fed doesn't cut rates in March, we may finally find out what the pigeons sound like.
